Business ownership: sole traders, partnerships, companies and franchises

The legal structure of a business shapes who controls it, who profits from it, who pays its taxes and — crucially — who is liable if it fails. A bigger or more risky business needs a more sophisticated structure.

Sole trader

The simplest form: one person owns and runs the business. About 60 % of UK businesses are sole traders. Examples: a freelance plumber, a self-employed designer, a market stallholder.

Pros

• Easy and cheap to set up — just register with HMRC.
• Owner keeps all the profit.
• Total control of decisions.
• Privacy — no requirement to publish accounts.
• Closer customer relationships.

Cons

• Unlimited liability — the owner is personally responsible for all debts. If the business fails, personal assets (house, savings) can be seized.
• Limited finance — banks lend less; no shareholder capital.
• Time pressure — only one decision-maker, often working long hours.
• Lack of continuity — if the owner is ill or retires, the business may end.

Partnership

2 to 20 people own and run the business together. Common in legal, accountancy, medical and consulting practices.

A deed of partnership sets out who put in what capital, how profits are shared and how decisions are made.

Pros

• Shared workload, decisions and stress.
• More capital and a wider range of skills than a sole trader.
• Still relatively easy to set up.

Cons

• Unlimited liability — partners share liability for each other's actions.
• Disagreements between partners can paralyse decisions.
• Profits shared — even if one partner does more work.
• A partner leaving may dissolve the partnership.

A limited liability partnership (LLP) is a modern variant where partners have limited liability — common for solicitors and accountants.

Private limited company (Ltd)

A separate legal entity owned by shareholders (often the founders and family). Shares cannot be publicly traded. Examples: Dyson Ltd (until 2003), Virgin Atlantic Ltd, many family-owned businesses.

Pros

• Limited liability — shareholders only lose what they invested if the company fails.
• More finance available (sell shares, easier bank loans).
• Continuity — company exists separately from its owners.
• Professional image.

Cons

• More expensive and complex to set up — register at Companies House.
• Must publish annual accounts (less privacy).
• More legal regulations (Companies Act).
• Profits taxed first as corporation tax, then dividends taxed in shareholders' income.

Public limited company (plc)

Like an Ltd but shares are publicly traded on a stock exchange (e.g. London Stock Exchange). Anyone can buy shares. Examples: Tesco plc, BP plc, Unilever plc.

Pros

• Massive access to finance — millions of shareholders globally.
• High profile and credibility.
• Limited liability for shareholders.

Cons

• Subject to takeover — if someone buys 51 % of shares, they control the company.
• Pressure to deliver short-term profits to keep share price up.
• Must comply with stock-exchange rules and publish more information.
• Owners have less control — diluted across many shareholders.

A flotation (Initial Public Offering, IPO) is when a private company first sells shares publicly — e.g. Deliveroo IPO'd in 2021.

Franchise

A franchise is when a business (the franchisor — e.g. Subway, McDonald's, Domino's) lets another business (the franchisee) trade under its brand and use its systems, in exchange for an upfront fee plus ongoing royalties (typically 5–10 % of revenue).

Pros for the franchisee

• Established brand reduces risk.
• Marketing, training and supply chains provided by franchisor.
• Higher success rate than independent start-ups.

Cons for the franchisee

• Large upfront fee (Subway ~£10 000; McDonald's ~£500 000).
• Less freedom — must follow franchisor rules.
• Ongoing royalties reduce profit.
• Brand reputation can be damaged by other franchisees.

Not-for-profit

Includes charities (RSPCA, Oxfam, Cancer Research UK), social enterprises (The Big Issue, Belu Water), community interest companies (CICs), co-operatives (John Lewis, Co-op).

• Aim is to fulfil a social or environmental mission, not maximise profit for owners.
• Surpluses are reinvested or given to good causes.
• Charity status grants tax advantages.
• Often funded by donations, grants, fundraising or trading.

Limited vs unlimited liability — the key concept

This single concept distinguishes the two big business worlds.

• Unlimited liability (sole traders, ordinary partnerships): owners are personally liable. A £200 000 business debt could become a personal debt that costs them their house.
• Limited liability (Ltd, plc, LLP, registered charity): owners' liability is limited to what they have invested. Personal assets are protected.

The cost of limited liability is publicity (publishing accounts) and regulation. Most growing businesses incorporate as Ltd as soon as the risk justifies it.

Examiner tips

For "advise / recommend a structure" questions, identify:

• The business size and risk.
• The owners' need for control vs investment.
• The desire for privacy.
• The capital required.

A growing business with significant risk and capital needs almost always benefits from limited liability.